After Enlargement Comes The Real Big Bang On January 1, 2005

Written by Malcolm Subhan | Updated: May 8 2004, 05:30am hrs
Indian exporters who braced themselves for the big bang on May 1, were gearing themselves up for a non-event; the real big bang will come on January 1, 2005, and may result in firms even going under. In any case, many of them will have to fight hard to maintain profit margins.

May Day was, of course, the day on which the European Union (EU) took a quantum leap, and its membership jumped from 15 to 25, making the 25-nation EU the worlds third biggest territorial unit, with a total population of 450 million and over one-fifth of world trade.

But enlargement was not a big bang on the trade front. As the EUs trade supremo, Pascal Lamy, noted in early April: From a trade perspective, enlargement has already taken place. No, the big bang will come on January 1, 2005. This is the day on which the quotas on their textile and clothing exports to developed countries, which India and other developing countries have had to put up with for the last 40 years, will disappear. The result will be an opening of the flood gates, with China in particular leading the rush to swamp the global market for textiles and clothing.

Prices, and profits, will inevitably take a beating.

Now compare this with the limited effects of the EUs sudden jump in membership. The plain fact is that Indian exporters have been competing on unequal terms with the 10 new EU member countries for several years now. This is because these countries have been enjoying quota-free entry for 95 per cent of their exports to the 15-nation EU and duty-free entry for some 80 per cent of their exports, thanks to the bilateral free trade agreements (FTAs) they concluded with the 15-nation EU in the early 1990s.

What has changed since May 1, is that the 10 new members now enjoy duty-free and quota-free entry for all their exports. Their trade advantage is offset to some extent by the preferential entry Indian exports to the EU are entitled to under the EUs generalised system of preferences. Bangl-adesh, however, has the advantage over India in this respect, as it enjoys duty- and quota-free entry under Mr Lamys Everything But Arms initiative.

Indian exporters, in other words, do not face a sudden and sharp increase in competition on the EU market from the 10 new members. On the other hand, access to the markets of these 10 countries is easier now because it is on the same terms as access to the 15 original members. Each of the 10 has had to terminate or modify its international agreements, and to take over the EUs multilateral trade commitments and obligations.

The 10 must also apply the EUs common external tariff. This means that overall their trade weighted tariffs have fallen from 9 per cent to 4 per cent. Import duties in Hungary have been halved, for example. The 10 have also had to give up their own anti-dumping and anti-subsidy measures, and adopt those in force in the 15-nation EU. Mr Lamys staff believes that the impact of this will be limited. It points out that the total economic activity of the 10 new member countries is less than 10 per cent of the activity in the earlier 15-nation EU. This suggests that the outcome of dumping or injury investigations for the 15-nation EU will be representative for the 25-nation EU also, although this may not be the case every time.

The 10 have taken over the EUs trade policy for textiles and clothing; as all the 10 are members of the WTO Agreement on Textiles and Clothing (ATC), this should not lead to major changes for Indian exporters, according to EU sources. The EU has increased the quotas on its imports from India and other developing countries, on the basis of the average of the last three years imports into the 10 new member states.

These quotas will disappear on January 1, 2005, of course, opening the door to large-scale imports into the 25-nation EU from India and other Asian countries. The enlarged EU benefits from a relatively cheap labour force, however, which it can now mobilise against imports from low-wage Asia suppliers.

The minimum monthly wage in Belgium, a founding member of the EU, was 1,163 euro in January, 2003; in Hungary it was just 212 euro, in Poland 201 euro, in the Czech republic 199 euro and a mere 116 euro in Latvia. Clothing manufacturers in the high-cost old Europe have been taking advantage of this situation through outward processing, sending fabrics to these countries, and to Tunisia and Morocco, to be made up into garments.

A recent UNCTAD study claims that jobs were not flowing to the 10 member countries before they joined the EU; it put foreign direct investment (FDI) flows to these 10 countries at a mere 3.5 per cent of FDI flows to the older 15 EU countries. The UNCTAD study points out that firms invest in new locations only if they are envisaging large new ventures and even then they must consider the trade-off between the synergies and relative security of old locations and the lower costs offered by new ones. The Geneva-based organisation is of the view that firms from outside the EU are more likely to invest in the new EU countries, using them as a regional export platform, replicating a global production strategy already tried out in China.

Mr Lamy has maintained that trade patterns are largely stabilised, and enlargement will not disrupt trade with third countries. The big bang that will launch a free-for-all clearly will come next January, with the disappearance of textile and clothing quotas.

At stake for Indian exporters are their textile and clothing exports to the EU, which came to 4.4 billion euro in 2002. It can be argued that this represented only one-third of Indias total exports to the EU. But India was no match to China, whose textile and clothing exports to the EU came to 12.6 billion euro that year. Even Bangladesh outperformed India in clothing.